The dull, dizzy rise of Compaq Computer

Rod Canion, the head of Compaq Computer Corporation, lays no claim to brilliance. ``We're not so big because we're so smart,'' the soft-spoken man says with just a twinge of Texas in his voice. ``We're $500 million [in sales] because the opportunity was very big.''

That may be true, but the opportunity was also very big for hundreds of other computer companies in 1983, when Compaq brought out its first computer. Most of them have gone out of business.

Earlier this year Compaq made the Fortune 500, faster than any other company, ever. It also reached $504 million in sales, making it the first company to top the half-billion mark in its third year of business.

And it's done this by going head to head with International Business Machines, 100 times its size, often beating it at its own game.

When IBM introduced a portable, for example, many thought it would be a knockout blow for Compaq's portable computer. But the Compaq outsells the IBM model 7 to 1.

It certainly isn't clear sailing from here on out. Compaq's territory is being invaded by the Japanese, South Koreans, and other cheaper IBM ``clones'' from below, and by the Wangs and Digitals and other minicomputermakers from above.

Beyond that, IBM in the past has trampled its pint-size competitors underfoot by dropping its prices or coming out with new products and luring customers away. Compaq, the most successful company piggybacking on IBM's computers, is an obvious target.

But thus far, Compaq has handled these threats without a misstep, says Seymour Merrin, vice-president of personal computing at Gartner Group, a computer consulting firm.

What has spared Compaq from the fate of Osborne Computer, which turned out the first popular portable computer and later went bankrupt? How does it differ from Apple, just now recovering from a year of disappointing sales and shrill confrontation at the highest levels of management?

If it could be summed up in one word, it would probably be ``maturity.''

``We're businessmen just doing our job and putting to use all the experience that this gray hair has come from,'' says John Gribi, chief financial officer, who does indeed have a head of gray hair.

If that breaks the stereotype of two young engineers toiling away in their garage, that just shows how much the computer industry has changed. It has come of age, it has slowed from its frenzied pace, and the cooler heads are the ones that will prevail.

``I admire Steve Jobs and Steve Wozniak [the founders of Apple Computer] and the people who were part of that exciting revolution that took place,'' says Mr. Canion, the chief at Compaq.

``I don't think it takes anything away from them to then say that as markets begin maturing, those skills aren't what's important to compete. It's more business-oriented skills,'' like keeping tabs on customer needs through market research and having a tight rein on finances, he says.

Compaq has resisted the urge, so prevalent in the computer industry, to introduce glamorous breakthrough products that often capture more attention than sales.

Instead, its strategy is rather dull, but profitable: It makes a line of computers that is completely compatible with the IBM PC, the industry standard. That way, any software (programs) written for International Business Machines -- and the lion's share of them are -- can be used on any Compaq computer.

Not even IBM has done that.

``Every Compaq is more compatible across the entire IBM line than IBM is across its own line,'' says Mr. Merrin, the consultant.

And IBM has paid the price. The PCjr was a flop, and the company's new laptop computer, which runs on a 3-inch disk (rather than the standard 5-inch) has had a lukewarm reception.

There's considerable pressure on Compaq to come out with its own laptop unit. Compaq has had the technology for two years, and Canion was in favor it it.

But market research said that this was one bandwagon to avoid. The largest identifiable group of buyers was the press, Compaq's market researchers found, which was only a few hundred thousand people at best. So for now, a laptop unit is not in the works, though Canion won't discount the possibility forever.

``People think that IBM is going to legitimize the market; but if the people aren't there with the need, then IBM having its name on a product isn't going to create new people who need it,'' he says.

The company spends about $1 million a year on market research, between 2 and 4 percent of the marketing budget, according to Michael Swavely, Compaq vice-president of marketing, who believes that percentage is second only to IBM.

Market research, rather than innovation, drives the company's product development, Mr. Swavely says. For example, in late 1984 Compaq's researchers noticed that 3 out of 4 business PC buyers were experienced users who had previously bought a computer.

So instead of following the trend and making a less-expensive, ``user friendly'' machine for the first-time buyer, Compaq came out with the Portable 286 and the Deskpro 286, which are aimed at the more sophisticated IBM AT.

The threat, of course, is that IBM will introduce a machine with ``closed architecture'' so that software developers could not look inside and write software for it. Then Compaq couldn't piggyback off IBM.

But Norm DeWitt, an analyst at Dataquest, a Cupertino, Calif., research firm, says it's too late for IBM to make that kind of maneuver.

``The software environment is such that it's gone beyond IBM,'' he says. ``IBM could close its architecture, but that would chase independent software developers after Compaq. . . .''

In distribution, as well, Compaq goes against the conventional wisdom that you should have your own sales force supplementing the sales in retail outlets. Compaq relies solely on dealers for sales and servicing.

``They have the best dealer distribution in terms of loyalty and cooperation,'' says Merrin, who was president of a computer retail store before joining Gartner. He adds that dealers chafe at the ``servitude relationship'' with IBM.

Since dealers aren't competing with it for sales, they are more likely to push a Compaq than an IBM, he says.

Consequently, dealers have been feeding Compaq information to help in the development of new products. Three months before introducing the Deskpro, a dealer told Compaq that his customers' biggest concern was losing data when the hard disk ``crashed.'' What they wanted, the dealer said, was a storage tape that would back up their data. Compaq officials say they took his advice, and the storage tape became a major selling point over the IBM AT.

Start-up companies are often defeated by their own success, lacking the financial savvy to manage fast growth and the subsequent slowdown. In this respect, Compaq management's nuts-and-bolts approach has guided the company through perhaps its most difficult stage, analysts say.

Compaq's sales went from a 195 percent increase in 1984 to 53 percent last year. This year, company officials and analysts expect it to do a little better than the industry as a whole, which is projected to grow about 30 percent in sales. As growth slowed, the company kept a vigilant eye on its costs, especially the cost of carrying inventories.

Early last year, for example, Compaq's researchers were projecting that the company would sell 65 percent portables and 35 percent desktop computers. But when they looked at shipments, they noticed that the ratio was closer to 50-50. They adjusted their production mix each week and ended the quarter with little inventory. For the year, the company generated $42 million by whittling down inventories -- money it used to finance growth without borrowing or issuing new stock.

Compaq can make these weekly adjustments because of its Japanese-style just-in-time inventory system, which has suppliers deliver parts a few days before the computers are assembled. Compaq's program for ensuring high quality from its suppliers provides for zero defects, which means it doesn't have to test as many products during assembly.

Unlike much of the rest of the industry, Compaq does not manufacture parts in Asia, where labor is less expensive. Because overseas manufacturers often require up to six weeks' lead time, computer companies end up doing things like marketing a product of waning popularity simply because the company just received a big shipment of parts for that product. Compaq wants more flexibility, and it reasons that the higher labor costs are worth it to avoid the marketing gaffes.

Whether Compaq can ride out future changes in the computer industry as well as it has in the past has yet to be seen. Mr. DeWitt at Dataquest says all but 75 to 100 of the 350 personal computer makers could well fall by the wayside in the next two years.

The market is gravitating back to what it was before personal computers hit the streets, he says. Businesses are no longer looking to personal computers to boost individual productivity, but to a circle of computers -- PCs, departmental minis, and corporate mainframes -- that can communicate with each other. Only the personal computers that can fit into that circle will survive. But DeWitt expects that Compaq will remain one of the top five personal computer makers.

If past is prologue, Compaq will probably figure out a way around these problems, too. After all, no one expected it to make the Fortune 500. Except, of course, the people at Compaq.